Societe General, Old News

A trader has stunned global financial markets by defrauding France's second-largest bank of €4.9 billion (US$8.2 billion) - potentially the largest fraud in financial history. Societe Generale, has announced a loss of €6.9 billion, the largest in European history. Lost in the exceptional loss was an important €2 billion write-down linked to the subprime mortgage crisis in the US.

Putting it in perspective, British trader Nick Leeson, who defrauded Barings bank of £725 million, causing Barings to collapse in 1995. The young Paris trader used his position, plus a knowledge of the bank's security system, to construct "a scheme of elaborate fictitious transactions" on European equity markets. He had been dismissed and legal action will be taken against him, said the bank's chairman, Daniel Bouton - who offered to resign but whose offer was rejected by the board. Also fired were "executives, including leaders, responsible for the supervision and controls on the operation concerned".

With trading in Societe Generale shares down by nearly 50 per cent in the past six months - largely due to concerns over its exposure to the subprime crisis - the bank said it would be forced to raise €5.5 billion in new capital to restore its balance sheet. Calling all Asian sovereign wealth funds, calling all sovereign wealth funds ...

Societe Generale was a leader in derivatives and was considered one of the best risk managers in the world, you would think they know a thing or two about minimising risk. Societe Generale said in a separate statement that its rogue trader had been carrying out what it called "vanilla futures hedging" on European equity markets. It said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority".

In 2003 rogue traders who entered false trades cost NAB's foreign exchange book US$360 million. The traders, who were all jailed, entered false trades to inflate profits, securing annual bonuses worth tens of thousands of dollars. In 2006, a 32-year-old trader named Brian Hunter at Amaranth LLC, a hedge fund, made a series of bad bets on natural-gas futures that led to losses of US$6 billion. Credit Agricole SA, one of SocGen's French competitors, in August 2007 revealed a similar trading incident that wiped €230 million off third-quarter net profit.

Its not a big deal nowadays, now its very difficult to bring down the company, so we must amaze at what Leeson did. These losses wouldn't affect the markets one bit. Gone are the days of Leeson and LTCM... those were the days.